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A sharp rise in non performing loans in 2023 and 2024 has induced fear of a property market crash as well as an economic slowdown reminiscent of the 1997 Asian Crisis. But are these fears justified? And what is the most likely outlook going forward.
Non-performing loans (NPLs) in Thailand have surged by 15% year-on-year, reaching 1.09 trillion baht in the first quarter of 2024. This significant rise, driven largely by auto loan defaults (up 32%) and housing loan defaults (up 18%), highlights growing economic vulnerabilities. Coupled with an increase in loans categorized as “special mention” (SM) at 644 billion baht, the situation underscores concerns about debt sustainability amidst Thailand’s uneven recovery.
Comparisons to the 1997 Crisis
Unlike the Asian Financial Crisis, where NPL ratios soared to 47%, today’s levels of roughly 4% are significantly lower. The 1997 crisis was fueled by corporate debt in foreign currencies, exacerbated by a collapsing baht. In contrast, the current debt issues are driven by domestic and consumer debt, making the financial challenges more widespread but less systemic.
This is clearly a very different kind of situation to the ‘Tom Yum Gong crisis’ in 1997, with the current crisis being more of a slow build up in consumer and house hold debt as Thailand transitioned to a more middle class economy. While a lot of the blame has been placed on covid the structural issues have been there for some time, covid merely sped up the process.
A More Resilient Financial System
Today, Thai banks have a better understanding of how to manage rising NPLs. They are now more proactive, and use measures such as selling off bad debts and implementing tighter lending policies. This has helped reduce the risks to the banking system. Some examples implemented include:
- Tightening home and car loan criteria in order to minimize risk.
- Loan restructuring programs for housing borrowers offer temporary relief, though such measures for auto loans are still limited
- Selling loans on the free market early, in some cases before they are even NPL’s
Impact to the housing market and economy.
There is a legitimate cause for concern in the property market in Thailand, as steps taken to mitigate risks can cause even more pressure to the housing sector. For example,
- Tighter home loan criteria from the banks reduces liquidity in the housing market
- Combined with interest rate increases, it is a double hit to liquidity in the market while creating more pressure for people to sell quickly.
In a market where people are forced to sell and buyers are limited, an obvious supply and demand issue arises. While current mortgage rates are around 5%, this is still far from historical highs. With the Bank of Thailand expecting to lower rates again in 2025, this should ease some of the pressure on homeowners. Combined with debt relief measures, the likelihood of a property fire sale seems low.
While household debt is at an all-time high, Thai people generally prioritize real estate over other assets. As a result, they are more likely to default on credit cards and auto loans, leaving real estate surprisingly resilient over time. Over the last 25 years, Thailand has experienced an average real estate price growth of 2.6% per year, with only minor dips in the overall market. Even during the GFC, property prices only dipped a few percentage points before quickly recovering. The last major property crash occurred during the Asian crisis in 1997, which, as mentioned above, was a vastly different and more severe scenario than today.
In terms of the economy this constrained consumer spending coupled with record closures of SME’s and an aging population is under significant strain. Despite this, Thailand still grew their gpd by 2% in Q2 of 2024 leading to hope that a recession has been avoided.
In conclusion, while the banking system is better prepared to handle rising NPLs the property market is still under significant strain. But it will most likely take additional external pressure to cause the market to crash significantly, and a more probably outcome is a lack of growth in this area for the near future and not a total collapse as seen in China recently.